S&P Global Ratings today took the rating actions listed above.
Among EMEA-based original equipment manufacturers, Volvo Cars would be the worst affected by U.S. trade tariffs. Sales in the U.S. represented a considerable 16% of Volvo Cars’ global sales in 2024, and except for one model (the EX90 produced in Charleston), the remainder is imported and thus subject to import tariffs. If U.S. import tariffs are set at 25%, we estimate Volvo Cars’ reported EBIT to be hit by Swedish krona (SEK) 6 billion-SEK7 billion in 2025 or SEK 10 billion on an annual basis before considering any mitigating actions. This represents approximately 40% on average of our pre-tariff adjusted EBITDA for 2025 and 2026.
In the short term, Volvo could mitigate the impact through selected price increases and some benefits from the management of used cars. Even after mitigation, however, profitability and cash flow generation would materially deviate from our earlier projections, with adjusted EBITDA down to 5.1% from 6.4% in 2025 down from 7.8% in 2024. In this scenario free operating cash flow (FOCF) would swing back into the negative territory in both 2025 (negative SEK10 billion versus positive SEK1.2 billion previously) and 2026 (negative SEK4 billion, versus previously SEK 3.5 billion) as investments remain high. The indirect impact of import tariffs on U.S. sales is more difficult to assess, and we have reflected our concerns on affordability on the assumed growth of sales in the U.S. within our base-case scenario. Volvo’s sales in the U.S. largely focus on its SUV models (XC40, XC60, and XC90) and are in direct competition with comparable models by BMW and Mercedes (also impacted by the tariffs but to a lesser extent).
Volvo’s announced SEK18 billion plan should help to protect mid-term profitability and cash flow. Volvo is pioneering an ambitious cost reduction plan that aims to reduce its variable cost (for SEK3 billion) and indirect spending (SEK 5billion). As part of the plan, the group unveiled 3,000 redundancies (including consultants) across the group, or 15% of the total office-based workforce globally. This will result in a one-time charge of up SEK1.5 billion on the second-quarter 2025 financials and effects starting form the end of this year into 2026.
In addition, the plan includes measures worth SEK10 billion from the reprioritization of capital expenditure (capex) and optimized inventory management, which, however, would not interfere with the ambition to fill the capacity of the Charleston plant (150,000 per year) with another model, likely a conventional plug-in hybrid electric vehicle (PHEV), on top of the EX90 and Polestar 3 produced for the U.S. and for Europe. Using Charleston for exports could support importing with the drawback system. In our base-case scenario, the plan should allow the group to recover credit metrics in line with 2024 only by 2027, provided that by that time, the U.S. ban against cars manufactured by automakers controlled by Chinese stakeholders will have been diluted.
Volvo Cars shares the pain of international premium brands in China. Volvo’s sales in China were down 8.1% in 2024 and 12% in the first quarter 2025. Like other legacy premium brands, Volvo Cars is penalized by the offensive of Chinese competitors entering the premium segment to escape the fierce price war in the world’s largest market. Volvo’s local battery electric vehicle (BEV) offering–mainly comprising the SUV B EX30, the EM90, the ES90 sedan and the EX90–lacks momentum, especially compared to its parent Geely Group’s multi-brand offering, based on preliminary stats for 2025 year-to-date (source: EV Volumes). The group’s PHEVs, particularly the XC60, enjoy better fortunes thanks to a more supportive market trend. This has led Volvo to launch another long-range PHEV this year, before the arrival of the all-new full battery EX60 scheduled to hit the market next year.
The negative outlook on Volvo Cars reflects its large exposure to U.S. import tariffs and the increasing marginalization in the Chinese market, which together will bring profitability and cash flow generation under pressure in 2025 and 2026, despite the mitigating action plan the group already announced to the market.
We could lower our rating on Volvo Cars if we lowered our ‘BBB-‘ long-term issuer credit rating on its parent Zhejiang Geely Holding Group Co. (Geely). As Volvo Cars represents a material share of the enlarged group’s adjusted EBITDA, this could happen if the trade war exacerbated or a material erosion of Volvo’s market position in Europe and the U.S beyond our current base-case assumptions. We could also lower the rating if the group had no headroom to mitigate the risk of a proposed 2027 U.S. ban on automakers controlled by a Chinese entity, as this would lead to a loss of access to the U.S. market, which accounted for 16% of Volvo’s sales in 2024.
We could revise the outlook to stable if Volvo Cars successfully delivered on its cost reduction and cash protection plan, reverting the drag on profitability and cash flow generation we anticipate for 2025 and 2026. We would expect to observe a trajectory toward stronger profitability and FOCF generation swinging back to positive territory.
SOURCE: S&P Global Ratings
